Foreign investor inflows to Turkey may double by mid-year – Reuters

Foreign investors may double the money they put to work in Turkey by the middle of this year after the authorities abandoned unorthodox economic policies and hiked interest rates sharply, Reuters reported on Monday citing money managers.

More than $15 billion has entered Turkey since November, when President Recep Tayyip Erdoğan replaced the central bank governor and promised a new market-friendly era, Reuters said.

More cash is set to arrive, thanks to some of the biggest returns in emerging markets.

"We're very encouraged to see a different approach coming in," said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management in London, which manages $67 billion, according to Reuters.

"We have added to our exposure and we plan to keep it that way as long as we continue to see the orthodox steps."

Turkey’s central bank has hiked interest rates to 17 percent from 10.25 percent in the past two months. New governor Naci Ağbal says he will keep monetary policy tight this year as he seeks to bring down inflation, which accelerated to 14.6 percent in December from 14 percent the previous month.

Reuters said it interviewed more than a dozen foreign money managers and Turkish bankers on the country’s outlook. Inflows of foreign capital could jump, especially if larger investment funds follow in the footsteps of hedge funds and take longer-term positions, it said.

Optimism over vaccines to treat COVID-19 and an economic rebound are increasing foreign investors’ appetite for emerging market assets. Flows in the fourth quarter reached the highest level since 2013, according to the Institute of International Finance.

Still, market scepticism concerning Turkey runs deep, particularly since a currency crisis in 2018, which wiped 30 percent off the lira’s value. In 2019, the lira dropped by 20 percent, even after it rallied in the last two months of the year.

Foreign ownership of Turkish local bonds has climbed to more than 5 percent of total from 3.5 percent. It was well over 20 percent four years ago, Reuters said.

Foreigners could hold 10 percent of the debt by mid-year through between $7 billion and $15 billion of inflows, Reuters reported citing six local banks it spoke to. Deutsche Bank sees about $10 billion arriving, it said.

Some long-term investors "are cosying up to the idea of being long Turkey but it's a long process", said one banker, who asked not to be named.

"There could be some value in Turkish assets, and we have started to look with a little bit more interest especially with the very high rates," said Joseph Mouawad, emerging debt fund manager at Paris-based Carmignac, which manages $45 billion of assets.

"It is still a hairy market to invest in but for sure, relative to what has been happening in the last 18 months, things have dramatically shifted and ... that has a lot to do with the people running the economic policy.”

Some foreign investors are less confident in Turkey, pointing to Erdoğan’s long-held aversion to high interest rates and his government’s frequently unorthodox approach to managing the economy. Erdoğan has fired two central bank chiefs since 2019. He reiterated his opposition to high interest rates last week.

"Investors didn't expect the leopard to have changed his spots and he hasn't. I suspect people will be feeling Erdoğan's influence by mid-2021" when rates will be cut too soon, said Charles Robertson, London-based global chief economist at Renaissance Capital.

"Turkey can't be a long-term investment for portfolio investors because they will expect the rinse-and-repeat process ... that we've seen so many times in the last 15 to 20 years," he said.